PFR 3-2

Gosford Co OTQ case

Information relevant to questions 106–110

The carrying amount of Gosford Co’s property, plant and equipment at 30 June 2018 was $620,000

and the tax written down value was $460,000.

The following information relates to the year ended 30 June 2019:

1)         At the end of the year the carrying amount of property, plant and equipment was $920,000 and the tax written down value was $540,000. During the year some items were revalued by $180,000. No items had previously required revaluation. In the tax authority in which Gosford Co operates revaluations of assets do not affect the tax base of an asset or taxable profit. Gains due to revaluations are taxable on sale.

2)         Gosford Co began development of a new product during the year and capitalised $210,000 in accordance with IAS 38. The expenditure was deducted for tax purposes as it was incurred. No any expenditure had been amortised by the year end.

The corporate income tax rate is 20%. The current tax charge was calculated for the year as $60,000.

106. Gosford Co’s assistant accountant is confused by the term ‘tax base’. What is meant by ‘tax base’?

107. Using the options below, show the taxable temporary difference to be accounted for at 30 June 2019 in relation to property, plant and equipment and development expenditure?

A. Property, plant and equipment

B. Development expenditure

108. What amount should be charged to the revaluation surplus at 30 June 2019 in respect of deferred tax?

109. What amount will be shown as tax payable in the statement of financial position of Gosford Co at 30 June 2019?

110. Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Which of the following is NOT a circumstance giving rise to a temporary difference?

Hunters Co OTQ Case

Information relevant to questions 111–115

Hunters Co increased the operating capacity of its plant on 1 April 2019. On the guidance of the finance controller, Hunters Co entered into an agreement to lease the plant from the manufacturer.

An initial payment is made on 1 April 2019 and the present value of the future lease payments at that date is $347,000. Payments in respect of the lease are made in advance and are $200,000 per annum, beginning on 1 April 2020. The lease does not transfer ownership of the plant to Hunters Co by the end of the lease term and there is no purchase option available. The rate of interest implicit in the lease is 10%.

111. Over what period should Hunters Co depreciate the right-of-use asset?

112. Hunters Co incurred initial direct costs of $40,000 to set up the lease and received lease incentives from the manufacturer totaling $14,000.

What is the initial cost of the right-of-use asset as at 1 April 2019?

113. The finance controller questions why the lease payments cannot be simply charged to profit or loss.

In which TWO of the following situations would charging lease payments to profit or loss be the correct accounting treatment, assuming Hunters Co takes advantage of any exemptions available?

1          The lease is for less than 12 months.

2          The asset has been specially adapted for the use of the lessee.

3          Ownership is transferred at the end of the lease term.

4          The asset has a low underlying value.

114. What is the total of the lease liability at 31 March 2020 in respect of this plant?

115. On 1 April 2019 Hunters Co also took out a lease on another piece of equipment. The lease runs for ten months and payments of $2,500 per month are payable in arrears. As an incentive to enter into the lease, Hunters received the first month rent free.

What amount should be recognised as payments under short-term leases for the period up to 30 October 2019?

Havelbean Co OTQ case

Information relevant to questions 116-120

Havelbean Co is a broadband provider which receives government aid to provide broadband to remote areas. Havelbean Co invested in a new server at a cost of $2,400,000 on 1 October 2019. The server has an estimated useful life of ten years with a residual value of $360,000. Havelbean Co uses straight-line depreciation on a time apportioned basis.

The company received a government grant of 30% of its cost price of the server at the time of purchase.

The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Havelbean Co has no intention of disposing of the server within the first four years. Havelbean Co’s accounting policy for capital-based government grants is to treat them as deferred income and release them to income over the life of the asset to which they relate.

116. What is the net amount that will be charged to operating expenses in respect of the server for the year ended 31 March 2020?

117. What amount will be presented under non-current liabilities at 31 March 2020 in respect of the grant?

118. Havelbean Co also sells a package which gives customers a free computer when they sign a two-year contract for provision of broadband services. The computer has a stand-alone price of $200 and the broadband contract is for $30 per month.

In accordance with IFRS 15 Revenue from Contracts with Customers, what amount will be recognised as revenue on each package in the first year?

Select the correct answer from the options below

119. Determining the amount to be recognised in the first year is an example of which stage in the process of applying IFRS 15?

120. Havelbean Co is carrying out a transaction on behalf of another entity and the finance director is unsure whether Havelbean Co should be regarded as an agent or a principal in respect of this transaction.

Which of the following would indicate that Havelbean Co is acting as an agent?

Miranda Co Case

Information relevant to questions 116-120

Miranda Co prepares its financial statements to 30 September each year. Miranda Co’s draft financial statements were finalised on 20 October 20X3. They were authorised for issue on 15 December 20X3 and the AGM of shareholders took place on 23 December 20X3.

On 30 September 20X3, Miranda Co moved out of one of its properties and put it up for sale. The property met the criteria as held for sale on 30 September 20X3. On 1 October 20X2, the property had a carrying amount of $2.6m and a remaining life of 20 years. The property is held under the revaluation model. The property was expected to sell for a gross amount of $2.5m with selling costs estimated at $50,000.

Miranda Co decided to sell an item of plant during the year ended 30 September 20X3. On 1 October 20X2, the plant had a carrying amount of $490,000 and a remaining useful life of seven years. The plant met the held for sale criteria on 1 April 20X3. At 1 April 20X3, the plant had a fair value less costs to sell of $470,000, which had fallen to $465,000 at 30 September 20X3.

121. In accordance with IAS 10 Events after the Reporting Period, which of the following statements is/are CORRECT for Miranda Co?

1          All events which occur between 30 September 20X3 and 15 December 20X3 should be considered as events occurring after the reporting period

2          An event which occurs between 30 September 20X3 and 15 December 20X3 and which provides evidence of a condition which existed at 30 September 20X3 should be considered as an adjusting event

122. In accordance with IAS 10, which of the following events would be classed as a non‐ adjusting event in Miranda Co’s financial statements for the year ended 30 September 20X3?

123. What is the total amount charged to Miranda Co’s profit or loss in respect of the property for the year ended 30 September 20X3?

124. In accordance with IFRS 5 Non‐current Assets Held for Sale and Discontinued Operations, what is the carrying amount of the plant in Miranda Co’s statement of financial position as at 30 September 20X3?

125. Which of the following items should be classed as an asset held for sale under IFRS 5?

Sutherland Co Case

 Information relevant to questions 116-120

Sutherland sold and installed a large item of machinery for $1,600,000 on 1 November 20X7. Included within the price was a 2 year servicing contract which has a value of $480,000 and a fee for installation of $50,000.

Sutherland works as an agent for a number of smaller contractors, earning commission of 5%.

Sutherland’s revenue includes $18 million received from clients under these agreements with $17.1 in cost of sales representing the amount paid to the contractors

Sutherland sold a large number of vehicles to a new customer for $10 million on 1 July 20X7.  The customer paid $990,000 up front and agreed to pay the remaining balance on 1 July 20X8. Sutherland has a cost of capital of 6%

126. How much should be recorded in Sutherland’s revenue in its statement of profit or loss for the year ended 31 December 20X7 in relation to the large machinery sale?

127. Sutherland’s sales director is close to selling another large machine, offering free service, therefore selling the entire machine for $1,120,000.  Sutherland never sells servicing separately

Sutherland’s sales director is close to selling another large machine, offering free service, therefore selling the entire machine for $1,120,000.  Sutherland never sells servicing separately

A. Machine

B. Installation

C. Service

128. What adjustment needs to be made to revenue in respect of the commission sales?

129. How much should initially be recorded in revenue in respect of the sale of vehicles in the statement of profit or loss for the year ended 31 December 20X7? Answer to the nearest $000.

130. On 31 December 20X7 Sutherland sold some maturing goods to a bank for $3 million. The estimated value of the goods at that date was $5 million, which is expected to keep rising. Sutherland keeps the goods on its premises and has the option to repurchase the goods on 31 December 20X9 for $3.63 million.

Which of the following outlines the correct treatment for the maturing inventory?